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Recasting or Shortening Your Mortgage – Pros and Cons

Written by Laura Martinez - 29 Comments

What would you do if you had a little windfall come your way? Would you spend it all, or would you look for ways to improve your finances, such as paying off some of your debt? Right now, many people are struggling with this question as they decide how to use their tax return and/or their $8,000 first-time homebuyer tax credit.

Some fraction of these people will (like us) be looking to pay down their mortgage loan with their tax refund. Instead of simply paying extra principal toward their mortgage, however, there’s another option to consider… They could recast, or re-amortize, their mortgage loan.

Each approach has pros and cons, and different people will arrive at different decisions depending on their goals and circumstances.

Shortening your mortgage term

I mentioned before that you can shorten your mortgage length paying extra principle on it every month. We’ve also covered some strategies for paying off your mortgage early. Making the extra payments can cut years off your mortgage and save you tens of thousand of dollars in interest, depending on your loan terms.

For example, with most 30 year fixed rate mortgages, you pay a huge amount of interest for the first seven years or so of your mortgage. As you get closer to the end of the life of the mortgage, more of your payments go towards principal.

The primary advantage with paying off your mortgage early (aside from peace of mind) is the big improvement in cash flow. Once your mortgage payment is gone, you’ll have hundreds (maybe a thousand or two) in extra cash each month that could be used for your other financial goals.

What is mortgage re-amortization/recasting?

Mortgage re-amortization is basically a loan modification that changes your monthly payments. Amortization refers to the paying off of a debt in installments over a set period of time. Instead of simply paying extra money towards principal, you may be able to use that money to reduce you balance due and re-calculate your monthly payments.

The advantage of re-amortization is thus that you can get lower monthly payments and have a slight, ongoing improvement in your household’s cash flow. It won’t be as big of a change as if you paid off the mortgage early, but you’ll get an immediate benefit.

You could then use the difference in the monthly payments to build your savings, pay down other debt, or build a retirement nest egg. Not all lenders offer this option, however, so check with your lender to see if you can recast your loan.

You should also check on what sort of fees are involved with, and what restrictions might be in place. Some lenders will allow you to do this multiple times, while others offer this as a one time deal.

Recasting vs. shortening your mortgage

You really have to know your plan for your mortgage and run the numbers to figure out the best option for you. If you plan on consistently over-paying your mortgage, then recasting won’t provide much of a benefit. If, however, you plan on just making a big payment once, and would rather reduce your monthly mortgage expenses instead of shortening the overall timeframe, then re-amortization may be something to consider.

Shortening your mortgage can have bigger costs up front as you’re putting more money in now, but your pay off will be on the huge decrease in your monthly expenses when it’s finished. You will also have saved tens of thousands of dollars in interest payments. Only you and your family have all the information needed to run the numbers properly and decide which option will put you ahead.

Sticking with paying off the mortgage early

When I looked at the numbers, recasting our mortgage wouldn’t make much of an impact on our cash flow. It would reduce our monthly housing expenses by only $50 or so. We think it would be better to just focus on going ahead and paying off our mortgage early. By focusing on getting a conservative mortgage amount, we’ve already created a little bit of a buffer between income and expenses.

Your thoughts

I’d love to hear your thoughts on this. If you had (say) $10,000 to pay down your mortgage, what would you do? Would you recast and go for lower monthly payments or would you shorten your mortgage? Why?

Published on May 25th, 2010 - 29 Comments
Filed under: Debt Reduction, Mortgages, Real Estate

About the author: helps families achieve financial freedom by sharing tips for reducing debt and building freelance income over at Couple Money.

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29 Responses to “Recasting or Shortening Your Mortgage – Pros and Cons”

  1. 1
    Nickel Says:

    We focused on paying extra principal. When we sold our first house we rolled the profits into the second one and then kept up with the pre-payments until we were able to make a lump sum payment at the end and kill off the mortgage entirely.

  2. 2
    John Says:

    I used my tax credit to pay down the mortgage to 80% L/V and eliminate PMI. I don’t plan to re-amortize. There would be a ~$70/month decrease in payments on my 15-year fixed loan if I recast and brought it back to the original maturity date. Right now I am 27 months ahead of schedule. I have no troubles at all making this payment right now and it is currently my highest interest rate.

    I will be making minimum payments for the foreseeable future as I have other financial goals I want to focus on, but not to the point of paying any fees for a re-cast.

  3. 3
    Seth @ Boy Meets Food Says:

    Obviously that is a personal decision that only you can answer, but fiscally, I’m think a recast could actually be worth considering in your case.

    I am in the same position. If I were to recast my mortgage, it would knock $55 off my monthly bill. Sure, having the flexibility would be nice, but what if you continue to pay the same amount you were paying (including the $50 in your case)? In my case, it knocks an entire year of payments off my mortgage! I guess the deciding factors are whether your mortgage company allows it, and if there are fees, but by just running those numbers, it looks like it would definitely be worth it!

  4. 4
    Brian Says:

    I am in the first year of a 30 year mortgage. We have some extra cash flow that could be used to pay down the principal, but I’m not sure I see the reason to do it, because we will probably be moving to a new place about 10 years from now.

    The way I see it, I could maybe shorten the mortgage length to 23 or 24 years by making extra payments, but since I will be moving earlier than that, I will never reach the point of being mortgage free on this house. I know that I would basically be pumping more money into the equity of my home, but I think I would rather be saving that money somewhere else.

    Does anyone see any reason why someone in my situation would make extra payments?

  5. 5
    Dave Says:

    There are some ideas which are perfect in theory but carry with it dangers in the practical realm. I am all for paying off a home mortgage as soon as possible….but no sooner! I would suggest keeping the flexibility a 30-year-mortgage provides, running out a printed payment schedule which shows your payment broken down by principal and interest, and paying off, say, 3 months worth of principal at a time, especially early in the loan when most of your payment goes to interest. You still get the advantage of a tax deduction for a few years while chunking off years and years worth of payments every year. Plus, you have money in savings to take care of emergencies and living expenses. Eventually, you’ll get to the point where much of your monthly payment is going toward the principal and that would be a good time to get rid of the mortgage with your savings. How do I know? I did exactly this paying off a 30 year mortgage in 15 years and a second 15 year mortgage on a new, larger home in 7 years. I am mortgage free and living (almost free) in the home of my dreams.

  6. 6
    LesInk Says:

    We’re doing things a different way. We’re year 2 on a refinanced 20 year mortgage (couldn’t quite do 15 year). However, we’re still focused on getting our 4-6 month emergency fund up. Once we do that, THEN we’ll focus on paying down the mortgage (to the tune we’re using to fund our emergency fund). If we have an emergency, we’ll stop paying more on the mortgage and go back to funding the emergency fund again.

  7. 7
    GoYanks Says:

    @Brian – does the return on “somewhere else” is more than your interest rate? If yes, then it makes sense to save your money “somewhere else”. If not, then pay down the mortgage even if you are moving out in 10 years. The extra payment not just reduces the length of the mortgage, it brings down the total interest you are paying on the mortgage. So more money goes in your house rather than going to the bank. When you sell it 10 years, your will get more money back!

  8. 8
    googgu Says:

    If you got an extra 10K save it somewhere safe. If your life situation alters – like loss of job – this will add on to your emergency fund.

    My strategy has been to hoard all windfalls etc until either I can pay off the mortgage entirely or a significant part of it. Because howmuch ever you prepay, the bank won’t understand the first time you miss a payment.

  9. 9
    Rosa Says:

    If someone handed me $8 or $10k, I’d probably put it in the stock market. But that’s because we don’t have nonmortgage debt, have an emergency fund (one year’s living expenses, approx – 6 months of our current spending), and already make consistent extra payments on our mortgage.

    If we didn’t have any of those other things in place, I’d put it towards whichever one was lacking.

  10. 10
    Patrick Says:

    If I had 8-10K I’d go to Vegas and put it all on red.

    Honestly, though I am putting my tax refund into a CD ladder. Right now it is not making more interest than what I am paying on my mortgage, but I have started this process with my kids and my wife. We took our money and created this plan.

    $8,000 tax refund broken down into equal parts labeled A1, A2, A3, and A4.

    With A1 ($2,000) we set up a 3 month CD at the local bank.

    With A2 ($2,000) we set up a 6 month CD at the local credit union.

    With A3 ($2,000) we set up a 12 month CD online with Ally bank.

    With A4 ($2,000) we put into the “fun” savings account at our local bank.

    My two oldest kids, ages 7 and 11 were sat down and showed the numbers, what a CD does, and how putting money into the “fun” account will be used for our next family vacation. We just got back from Disney a few weeks ago and it was a blast.

    As each CD comes mature we will roll it plus the interest earned into a new CD and track on a printed off graph paper and excel showing how compound interest works.

    So, when A1 matures at the end of the 3 months we will roll it into a 6 month CD.

    When A2 matures at the end of 6 months we will roll it into a 12 month CD.

    When A3 matures at the end of the 12 months we will roll it into a 3 month CD.

    We do this to capture the rise of interest rates, like I said, it’s more for a teaching point than anything else with my kids.

    With the “fun” account we track that month to month and show them what happens if we go out to eat more than once a week. The kids really want a swing set for the backyard and I told them that we could get one when we could pay for it out of the “fun” account but that we had to leave 25% of the balance at all times. Another chance to teach my kids about math and how you use it in real life outside of school. The swing set they want costs $1,750, which is a bit over the top but I am also liking the idea because now they are aware that we need to save for the swing set and build up our “fun” account. With a starting balance of $2,000 a $1,750 swing set would reduce our balance to 12.5% thus we can’t do it at this time.

    Could I pay more on my mortgage and teach them that way, yes, but would it have the impact of numerous lessons throughout the year and end with them getting a swing set that they helped save for? Don’t know, but that is the beauty of living in America, I am free to make these decisions.

  11. 11
    Carol Says:

    We definitely would use any extra money to pay down principal. There’s no penalty on our mortgage to pre-pay, and that’s just what we do. We live on my husband’s salary and use mine to pay down the principal. I received a bonus this year (I almost fainted), and most of that went toward an extra principal payment. We’re so stinking close to paying off our mortgage – if all goes well, it’ll be paid off by August of this year.

    I recommend to anyone who doesn’t have a prepayment penalty to just use extra money to pay toward principal instead of getting complicated by trying to change the terms of your mortgage. We have a 30 year fixed mortgage, but we knew we’d never have it for that long. But it is nice, especially when a job loss seemed imminent for me a year ago, to only pay the minimum (i.e., our regular mortgage payment without extra principal) for a while.

  12. 12
    Lea Says:

    I am actually searching for a lender that would allow for a recast in a year or so. I am seeking for blend two mortgages into one now at a fixed, 15 year rate, then plan to sell the secondary home after July next year. Does anyone know of a lender that is allowing recasts? I’ve talked to three, but no luck. Suggestions?

  13. 13
    Diane Says:

    I have a 15 year mortgage on my home with a principle balance remaining of $41,000 dollars, currently paying about $3000 dollars interest per year.

    I am retired, on a fixed income and able to save a few hundred dollars a month, only because I own a mortgage-free rental house. I need the rent to pay the above mortgage. I live simply and frugally, but would love to travel some.

    I might live another day or about 12 years: in stable health, but of course one never knows the future.

    I would love to hear your opinion. Thanks.

  14. 14
    Aaron Says:

    @ Patrick – You are making a financial mistake. You are saving your money in a CD that is earning about 2%, when you are paying interest on your mortgage at about 5%. Thus, you are losing the difference. You should put your CD money toward the principle of your mortgage. However, we do live in America, and you are free to do what you want with your money.

  15. 15
    Patrick Says:

    @ Aaron – I understand where you are coming from when you state that I am making a financial mistake; however, there are numerous possibilities to take into account with how someone spends/saves their money.

    In the last year alone the value of my home assessment has dropped $15,000, which in my mind means that any extra money I had paid on the principle would essentially been wasted. That may be taking it to the extreme, but why should I give the bank money today that I may never see again? What if I am forced to short sell my house due to unforeseen medical expenses or a job loss? I can always cash out those CD’s, if I pour money into my house and don’t have the option to recoup any of that then in my opinion I have lost financial flexibility, which is more important to me than a few interest points.

  16. 16
    Peter Says:

    Recast is much better than shorten your loan. Recast bring down your monthly payment and also reduce the principle you owe on the loan amount.

    Shorten your loan by paying into the principle will not and the monthly principle and interest stay the same. Thus you are paying a lot of interest in the monthly mortgage payment.

    My monthly mortgage payment started out about $650.00 a month in 2005, now it is $124 dollars because I recast 3 times. I am about to do another recast next month and reduce the monthly mortgage payment down to $54.60.

    If I did not recast my loan, my interest paid to date would have been around $35,000 to $40,000. Since recast, my interest paid to date is only $20,000 and give me $600.00 a month cash flow to have for next month after the 4th recast.

    If you do not recast, you wouldn’t have the cash flow coming and paying a lot of interest in the monthly mortgage payment.

  17. 17
    Ms. A Says:

    Since some lenders refuse to recast a loan, can you give names of lenders that will recast a loan???

  18. 18
    DIANE Says:

    Bank of America will recast-when I get my tax return this year, I am seriously looking into this as in retirement I need to have a smaller monthly mortgage payment.
    Any one have any thoughts otherwise?

  19. 19
    MK Says:

    Another advantage of re-casting is that equity goes up since you are paying off more principal on the home.

  20. 20
    Jim Says:

    Bank of America will recast though there is a fee of $250. We are in a bit of a predicament with our mortgage. I am retired and my wife has a good job but would like to retire in a few years. All of our retirement funds are in IRA/401k. I have thought about recasting my mortgage so our cash flow when we are both retired is greater allowing us to stay in our house. One thing to think about is how pulling money out of an IRA will affect your taxes…again hoping that the housing market turns around and we may be able to sell our home for at least a moderate profit…wishful thinking!

  21. 21
    Doug Says:

    Recasting: Looking to put a chunk down on a $70K balance of a rental property. This would free up @ $195 a month in cash flow. We’d save @ $16K in interest if we sold the rental in 10 years; we’d also have a shorter payoff date.

  22. 22
    Lindsay Says:

    Am I missing something? I’ve been searching all over trying to find clarification on this… regardless of how long you have a mortgage, or how much the home depreciates in value, a loan is a loan and has to be paid back, right?

    I still owe about $90,000 on my home and am about 6 years into a 30 year mortgage. I will probably not be living there the full 30 years. Maybe I’ll try to sell in more like 5-10 years.

    I have plenty of backup money for any kind of large emergency that would come up, so that isn’t a factor. I do once in awhile accumulate an extra thousand or two beyond that large backup “cushion” of money. For example, I currently have about 1-2 thousand that I was considering putting down on my mortgage as an extra principal payment.

    I’m seeing all these comments about why that’s not a good idea if I plan to move. But I have this $90,000 loan and that has to get paid back regardless. So doesn’t it make sense to pay off that part as quickly as I can, regardless of whether I stay or move, and then in the process my monthly payment each month will be paying off more principal and less interest?

    This seems like a no-brainer to me but I am afraid I’m missing something big. Any replies would be appreciated. Thank you!!

  23. 23
    mike krauss Says:

    We have paid off two homes and working on a third. We have saved thousands in interest payments by paying off the two mortgages.
    We are presently considering either recasting or refinancing our present home loan, we have $85,000 to put towards principal. By doing either we will reduce our monthly payment by $480.00 a month or more.
    My vote would be to pay off mortgages. You can live in them or you can rent them out for a monthly income. Kind of like a pension check coming in monthly.
    Recasting your loan is cheap $250.00 one time fee. Refinancing is more costly but if you can substantially reduce your interest rate it will be well worth it in the long run. And paying down principal is like building a savings account, creating equity in your investment, your home. It’s all good if you can afford it.
    We are both retired and both have pensions.

  24. 24
    jp Says:

    I’m convinced that paying off debt that is at an interest rate of 5,6, or 7% is far more beneficial that putting money in the bank to earn 1% or less. Any money you put into your loan is like putting it in a piggy bank (unless you’re “underwater” on the loan, then that’s different).

    My main question is this: Compare these two scenarios:

    I have a loan balance of 265000 , approximately 6 years in to a 30yr/330,000 loan. PITI are 2100 per month. I’m paying an extra 600 per month to have it paid off in 15 years. If I recast the 265K and continue to pay the same $2700 per month, do I come out ahead or the same?

  25. 25
    jp Says:

    Never mind, I just figured out on Bankrate that the payoff date is exactly the same whether I recast the loan or not. Only the obligatory payment goes down (giving one more flexibility in tough times)

  26. 26
    Laurie Says:

    But doesn’t recasting a loan mean starting over in your amortization schedule? Because, I don’t want to be paying most of my monthly payment towards interest when I’m currently 10 years into a 30-year mortgage. I currently am adding to my principle each month as I can afford to do it. But if I don’t need to save the additional money on the monthly payment recasting would give me then why do it? Plus, the bank wouldn’t do recasting unless they are getting something out of it–namely, most of the new payments going towards interest, therefore making the bank more money and hoping you’ll sell your house early anyway.

  27. 27
    Lea Says:

    Laurie. Recasting allows a person who wants to pay down a big chunk at one time against the principal to obtain a new loan — with no closing cost other than a usual $250 recast fee –at the same rate, but with the new interest payment based on the new remaining principle balance, greatly reducing the required monthly payment. If one wants to continue paying the amount of the original monthly payment, much more money is going to the principle. At least that is my understanding. You Pros out there….can you shed some light on this thinking? Thanks.

  28. 28
    Matt Says:

    It seems that becoming debt free is the American Dream. I’m in favor of paying off your mortgage ASAP. Recasting sounds like it just lowers your payment without starting over with a 30 year mortgage. In essence this will be what we do in the near future when selling another house we own that’s free and clear. Option 1 should be to,use the money upfront when first getting your loan but if it’s a few years later then by all means recast if your bank allows.

    Its not how much you make to a degree, it’s how much you keep. Payments on bills (especially mortgage) sucks your bank dry in all cases.

  29. 29
    Walt Says:

    We had a situation where, pre-retirement, we sold our home to move closer to the kids. As we closed on our new house before our existing one sold we had a really large mortgage as it was sales price minus bridge loan amount. When our original house sold we put that money against the new mortgage, lowering the principal but not the payment. While in this mode a layoff pushed me into retirement which meant the over $2,000/month payment was not sustainable. Recasting moved that $2200/month payment down to $500/month. It is unfortunate we won’t pay it off in the next year, as I had hoped, but we also won’t be losing it for non-payment.

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